Topic 3

According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____. 5; 5 1; 5 5; 1 1; 1

5; 5

Liabilities of banks include: - demand deposits. - currency in the hands of the public. - loans to customers. - reserves.

demand deposits.

The money supply consists of: - currency plus demand deposits. - currency plus the monetary base. - the monetary base plus demand deposits. - currency plus reserves.

currency plus demand deposits.

If many banks fail, this is likely to: - decrease the amount of currency in circulation, if the Fed takes no action. - increase the ratio of currency to deposits. - have no effect on the ratio of currency to deposits. - decrease the ratio of currency to deposits.

increase the ratio of currency to deposits.

When the Fed increases the interest rate paid on reserves, it: - increases the reserve-deposit ratio (rr). - decreases the reserve-deposit ratio (rr). - decreases the monetary base (B). - increases the monetary base (B).

increases the reserve-deposit ratio (rr).

The use of borrowed funds to supplement existing funds for purposes of investment is called: - leverage. - arbitrage. - intermediation. - convergence.

leverage.

In a fractional-reserve banking system, banks create money when they: - hold reserves. - exchange currency for deposits. - make loans. - accept deposits.

make loans.

If income velocity is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M. - nominal GDP - prices - transactions - income

nominal GDP

The currency-deposit ratio is determined by: - the Federal Deposit Insurance Corporation (FDIC). - the Federal Reserve. - business policies of banks and the laws regulating banks. - preferences of households about the form of money they wish to hold.

preferences of households about the form of money they wish to hold.

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the: - money supply is constant. - velocity is constant. - inflation rate is constant. - real interest rate is constant.

real interest rate is constant.

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is: -5 percent. 1 percent. 6 percent. -4 percent.

-4 percent.

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent. 3 4 7 1

7

In a system with fractional-reserve banking: - no banks can make loans. - all banks must hold reserves equal to a fraction of their deposits. - the banking system completely controls the size of the money supply. - all banks must hold reserves equal to a fraction of their loans.

all banks must hold reserves equal to a fraction of their deposits.

The reserve-deposit ratio is determined by: - preferences of households about the form of money they wish to hold. - the Federal Reserve. - business policies of banks and the laws regulating banks. - the Federal Deposit Insurance Corporation (FDIC).

business policies of banks and the laws regulating banks.